Tax implications of moving property into LLC

9 Replies

So it's pretty clear (to me at least) that I should be moving properties titled in my name into an LLC based on the recently passed tax bill. They have been in my name for several years now. Are there an implications with respect to recaptured depreciation if I change title? Any other things I need to watch out for?

Why is it clear to you that you should change ownership to an entity?

Pass through entity tax rate is now 20% instead of my personal income tax rate or am I wrong?

Changing ownership to an LLC is a sale of the property. You will incur most of the impacts of the sale (transfer taxes, cap gains, mortgage due on sale clause, etc). You will lose your low cost government-subsidized residential mortgage if you have one and will need to find a commercial mortgage if you need financing.

The most significant benefit I see in the tax law for this specific situation is the 20% deduction to pass through income.  In my case of only 4 SFRs, that amounts to a savings of less than $1,000 per year in actual taxes paid, but a larger real estate investor would do much better.  It would take me a while to recoup the costs assuming the tax law doesn't change again.

Capital gains is would be minimal at fair market value and there is no mortgage. Transfer taxes could be significant. I guess if it counts as a sale, then recaptured depreciation IS an issue? I come to about $1k per year savings on the property in question.

Would there be any tax benefit to setting up a property management LLC and running it through that entity while leaving the unit titled to me personally?


Originally posted by @James Mc Ree :

Changing ownership to an LLC is a sale of the property. You will incur most of the impacts of the sale (transfer taxes, cap gains, mortgage due on sale clause, etc). You will lose your low cost government-subsidized residential mortgage if you have one and will need to find a commercial mortgage if you need financing.

The most significant benefit I see in the tax law for this specific situation is the 20% deduction to pass through income.  In my case of only 4 SFRs, that amounts to a savings of less than $1,000 per year in actual taxes paid, but a larger real estate investor would do much better.  It would take me a while to recoup the costs assuming the tax law doesn't change again.

The tax law doesn't appear to consider who or what manages the property.  Only ownership matters.  This is probably a good question for your accountant to see if there are detailed loopholes for your situation.

@Dan Robinson

I would talk to your CPA and see if you should have some profit go to the new management LLC. SEP would be the negative aspect but everyone is still trying to figure it all out.

I am NO CPA so please consult your own. But my understanding is as follows:

I believe there was a change in the tax law that said for pass through entities (assumed to be s corps and llc's), you can deduct 20% of the net income of the business.

So if your rentals were showing a net profit of 10k a year after all expenses, depreciation, etc, and they were on your personal return, you'll be responsible for paying taxes on the entire 10k - which is what occurs today.

However, if you were to move those rentals into an LLC or S Corp, they would presumably have the exact same 10k in net profit for the year. Under the new tax law, you would get to deduct 2k of that net profit so only 8k of that profit would be passed through to your personal return and you'd only pay taxes on 8k instead of 10k.

If you're in the 25% tax bracket, you'd save $500 in taxes by switching it over. And then you'd probably pay $300 to 700 a year to renew your entity with the state and another 300 to 500 extra for your cpa to do the entity's tax returns.

So I'd be hesitant to create a pass through entity unless you're showing a significant amount of net profit. Most investors have enough depreciation to offset that income so we're still not showing much if any profits. But at some point, if you're showing 20k to 30k or more in net profits, then I would think it would likely be worth your while to move your stuff into the LLC.

In terms of the tax implications, thats another question for your cpa. But my understanding is that as long as your properties are currently in your name only and as long as the entity you move them to is a pass through entity where you are the only member/owner of that entity, there would be no tax implication.

The issue may come into play as to whether you're lender has an issue with you deeding the property out of your personal name and into the entity. Typically, they're ok with you doing that with a trust. But some lenders don't like them getting deeded into an entity.

The risk there is that today you may be the sole owner/member of that entity. But tomorrow someone else may become a partner which could entitle them to some ownership stake of the property that they would then go after should the partnership/corporation entity have issues.

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